Involuntary Investing: Cyprus Deposits Turned Into Equity

On Sunday, the Bank of Cyprus announced that it would convert uninsured cash deposits in into equity.  The controversial move is one of the conditions from European Union lenders as part of its financial aid for the financially distressed island.

Soon after the announcement was made, industry observers called the process a “bail-in” which forced bank depositors to become involuntary investors in what is potentially a high risk proposition of saving Cyprus’ financial system.

Thos with uninsured cash deposits will pay for the Bank of Cyprus’ recapitalization after the latter wrote off billions of dollars from its exposure to debt-crippled Greece.

Involuntary Investing

During the weekend, the island’s largest bank converted 37.5 percent of deposits exceeding 100,000 euros into “class A” shares.

There’s more – just in case the Greek losses were bigger than initially reported.  An optional 22.5 percent is being held as a buffer which could be converted to equity in the future.  There’s more.  Another 30 percent would be temporarily frozen and held as deposits.

Involuntary Investing: Cyprus Deposits Turned Into Equity image Cyprus Commons Wikimedia 600x446Involuntary Investing: Cyprus Deposits Turned Into Equity

Credit: Commons/Wikimedia

Investor Protesters

The government is deploying security forces across the island in what is projected to be clashes with demonstrators and angry “investors” this week.  The world could witness a violent and impromptu “stockholders meeting” in the streets of Cyprus in the next few days.

However, proponents of the deal argue that restructuring of several Cypriot banks is necessary since, in addition to exposure to Greece, the tiny Mediterranean island is in a deep recession for the least two years.  The country’s second-biggest lender, Popular Bank, has already been dissolved.  Cyprus is part of the Eurozone.

On Friday, Eurozone finance ministers met in Dublin on to discuss terms of the Cyprus bailout and the possibility of extending rescue package repayment dates for Ireland and Portugal, according to Banc De Binary.  The bailout amount is expected to be about 10 billion Euros which will be funded by several European countries and the International Monetary Fund.  Cyprus is seeking 13 billion Euros.

The precise recapitalization needs of the bank won’t be known until the end of June.  Thus, it’s possible that more austerity measures will be meted out by the EU.

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